You can be an intelligent investor if you follow the principles and strategies of Benjamin Graham and Warren Buffett. You can also be a smart investor by avoiding 8 common traps – mind games – that Alan Kohler warns investors fall into. Even before you start investing, there are a few little barriers you may need to overcome.
Barriers to investing
We’ve already seen how psychology has a role in investing and some of the many reasons why many people put it off. It involves money, emotion charged at any time; so too financial concepts, numbers, maths and statistics that many people avoid – or say they’re just ‘not good at’. The sheer volume of new information and concepts to learn, combined with the pressure of not wanting to make a bad investment, lose money and impact on your or your family’s future – can cause fear and play on your mind.
Blame it on the finance nerds and the media!
Often the finance industry and media don’t help – apart from some with a sense of humour and who can explain the many complex issues in simple terms. Such as Alan Kohler’s witty, yet relatable finance reports and graphs on the ABC; Scott Pape’s laid back style and easy to understand investing articles, blueprints and media appearances; and the down to earth, consumer friendly approaches by David Koch, Ross Greenwood, Paul Clithero and others.
Many still find business and finance dry and uber serious. Finance ‘nerds’ giving sombre often unintelligible analysis, live updates of the latest index rise and fall or whether gold or Guatemalan goose feathers have gone up or down!
Unless you’re in a business where daily fluctuations matter, you may be share trading, buying on market rises and falls – do you need to fill your already overwhelmed investing head with this information? Does it really impact on your busy day to day lives and decisions?
Not so female friendly!
Little wonder too that many, especially many of my female friends and acquaintances, have little or no interest in investing – or just give up! With the exceptions of small business and property investing, where investing is often less intimidating, more straight forward and creative! See some women and investing material in our Hot Topics.
But investing education and advice is gradually improving as consumers demand it be clearer, simpler and more tailored.
Gradually too traditionally male dominated business, finance, legal, and political systems are becoming more inclusive and addressing some of the inequities. In particular the inequality women face with superannuation – live longer, retire with less (go figure?!) see Mark Bouris in BiG’s Hot Topics. More too in BiG Book #5 Investing in Yourself.
How can you be an intelligent investor?
This idea of being an ‘intelligent investor’ in a specific, narrow definition sense developed, and its principles became entrenched in stock market analysis, after Benjamin Graham’s 1949 book The Intelligent Investor. The principles and system of value investing are followed by many devotees and underlie the success of the world’s most famous successful investor, the ‘Oracle of Omaha’ – Warren Buffett.
There are endless official and unofficial – books, publications, websites, commentators and advisers that dissect or claim to have found the essence of intelligent investing, or the ‘Buffett way’, Buffett’s ‘secrets’. Unlikely to be any secrets, given he shares his advice and thoughts freely in his letters to shareholders and elsewhere! Perhaps the secret to his success is that he invests like a woman!?
The quickest, perhaps best way to become an intelligent investor is to follow, or get advice from one of the many who have studied and applied the principles of value investing. Apart from getting a general understanding, why not leave the intellectual rigour and analysis (intelligence in a broader sense) to them? Scott Pape, The Barefoot Investor, an unashamed devotee, for example?
How can you be a smart investor too?
You can be an intelligent investor and a smart investor too. Especially if, as Alan Kohler suggests, you keep your own investing beliefs anchored in realty and not wishful thinking … and avoid the traps investors commonly fall into:
- Anchoring – Anchoring investment beliefs in information or events that no longer apply (eg buying last year’s best performing asset class in the belief past returns will be repeated)
- Availability – Basing decisions on availability without checking alternative sources (eg property investors buying in their local area)
- The certainty effect – Investors and markets hate uncertainty – preferring small certain gains to a larger uncertain one (eg GFC rush to gov. guaranteed deposits, despite low returns, so missed out on profitable early stages of share market recovery)
- Confirmation bias – Looking for information that confirms beliefs, ignoring anything contradictory (eg final stages of a bubble, people believe commentators who say rise will continue, despite price not reflecting true value)
- Framing – Reaching a conclusion based on the framework in which it’s presented (eg invest $10k, increases to $12k. Think risk is only $10k, in fact it’s $12k. Think if drops to $11k – still ahead, in reality $12k at risk. Constantly re-evaluate based on current reality)
- Magical thinking – Erroneous belief that certain behaviour leads to desired effect [in reality no causal connection]
- Regret avoidance – Avoid actions that confirm you’ve made a mistake (eg avoiding crystallising losses)
- Representativeness – The danger of investing based on stereotypes (eg if decide company/management are hopeless due to losses, fail to acknowledge evidence of a profitability turnaround)
adapted from Alan Kohler’s Eureka Report – Guide to Personal Investing (and Barbara Drury)
So – good luck working on any barriers that may be stopping you investing; use any intelligent investing principles that appeal to you; and avoiding investing mind traps.
And don’t worry, you’ll become a smart investor!
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I’d also be delighted if you find BiG and my work helpful, and share it with friends, family and others who want to build on their investments. (Just click on the “Subscribe” green button to the right and be part of the Challenge and receive our updates – free!)
All the very best with your investing!
the Bucket List Investing Chick
Day 25 BiG 30Day Investing Challenge| Time to invest – just do it! Step 4 Build your own investing plan and strategy.
Day 26 BiG 30Day Investing Challenge| Time to invest – just do it! Step 5 Time to shop – for your investments! Day 27-28 W/E
Where we’ve been – 30 Day Challenge Blog overview:
Day 5 – Who Can You Turn to for Investing Help? People and ‘Players’ in the Investment Industry (Day 7-8 W/E)
Day 12 – Part 4 Less Regulated Advisers – Analysts, Commentators and Gurus (Day 13-14 W/E)
Day 19 – Who are the best investment gurus? Part 4| Choose a Guru (Day 20-21 W/E)